Forming a corporation or a limited liability company (LLC) is a straightforward and cost-effective way for business owners to help protect themselves against personal liability for obligations of their businesses. A good business lawyer can help business owners understand the advantages and disadvantages of each entity type and assist with the process of entity formation.

The main expense associated with forming a corporation or LLC is the attorney time necessary to put together organizational documents for the new entity. These include articles of incorporation (called a "certificate of incorporation" in some states) and bylaws for a corporation, or articles of organization (called a "certificate of formation" in some states), and an operating agreement for an LLC. That said, an experienced business lawyer will likely be able to affordably draft the appropriate documents for small businesses with straightforward ownership and management structures. Some law firms -- such as ours -- also offer entity administration services, which help take care of the annual formalities associated with maintaining a corporation or LLC. These services can be very cost-effective (e.g., just a few hundred of dollars per year).

But simply forming an entity is not enough to protect a business owner against all personal liability.

Among other things, once an entity is formed, it is also important that it observe certain formalities to help ensure that courts will not hold its owners responsible for its liabilities. For example, in the case of a corporation, annual meetings of shareholders and directors should be held. Also, there are limits on the extent to which licensed professionals can use entities to shield themselves from personal liability. Moreover, in many cases, landlords and other parties with which an entity does businesses will insist upon personal guarantees from an entity's owners. A good business lawyer can help business owners navigate these issues.

Finally, there are a variety of tax considerations that need to be taken into account when an entity is formed. For example, should a business entity make an election under Subchapter S of the Internal Revenue Code, which, among other things, will cause tax liability to be passed through to individual shareholders (without the double taxation that results when a corporation is taxed separately), as partnerships are taxed? Depending on a business' specific plans and goals, the various restrictions associated with qualifying as an S corporation may be too onerous, and operating as an LLC taxed as a partnership may be more appropriate. Whatever the ultimate decision, it is important for business owners to understand the trade-offs associated with making a Subchapter S election or not doing so.

The need to assess the tax considerations relevant to a particular business structure is a good example of why it is essential that a good business lawyer have access to specialized expertise. Tax law is complex and ever changing, and business owners are well-served by business lawyers who can bring in the right tax lawyers to help business owners consider the long-term tax consequences of decisions made early in the lives of their businesses. Likewise, the advice of a good accountant can also be invaluable; among other things, parties seeking to invest in or acquire a business will usually insist that the business provide professionally prepared financial statements. A good business lawyer will maintain a network of skilled accountants, and should be able to introduce you to one who is right for your business.

I have often seen what happens when businesses fail to consider these issues early on. One of the most satisfying parts of my job is assisting small business owners who have grown their businesses into large enterprises and decide to sell these businesses or bring in additional investors to help fund further growth. As part of this process, it is important for me to understand these businesses and their legal structures. This can often be inspiring: an entity's legal documents can show how a business grew from a true "mom and pop" operation, with one location and perhaps a used van, into a large and profitable enterprise. But, unfortunately, when business owners have attempted to "do it themselves," important organizational tax, accounting, and other considerations have often not been taken into account, leading to significant legal expenditures and tax consequences down the road.

Note: This article is not exhaustive; identifying all legal considerations regarding entity selection and related tax decisions would require much more space than I have here. On top of that, each industry sector presents its own unique set of legal challenges. Each of the key legal items covered here should be discussed with a skilled business lawyer.

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